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Clinton's Economy, and Kennedy's
J. Bradford DeLong
Danziger Associate Professor of Economics, Harvard University
A centrist Democrat wins the presidency, ending a decade of conservative rule. His economic advisors criticize their Republican predecessors: the economy is in bad shape, they say. The Republican administration undermined the long-run foundations of American prosperity. Investment in America has been allowed to decline. Long-run productivity growth has been far below the rate the healthy American economy should generate. A painful recession has left millions unemployed, and opened large gaps between actual and attainable levels of production. Bold and innovative economic policies are needed to get the country moving again.
Bill Clinton in 1992? Yes, but also Jack Kennedy in 1960. In large part the problems and opportunities that Clinton and his advisors face today were also faced by Kennedy and his advisors in 1960. Then economic management was extraordinarily successful. Up to the end of the decade, when Johnson's unwillingness to tax in order to pay for the Vietnam War began the upward spiral of inflation, the 1960s were an economic golden age: unemployment was low, productivity growth extremely rapid, and the fruits of prosperity relatively equally distributed--we have not seen its like since. The success of Kennedy's economic policies can teach us lessons about how Clinton should proceed. But we cannot expect too much, and we surely cannot expect another growth golden age like the 1960s. Eisenhower handed Kennedy a sluggish economy like the one that Bush has handed Clinton. But Eisenhower handed Kennedy a federal budget in sound shape, while Bush hands Clinton--the budget deficit.
Kennedy's economic advisors minced no words in condemning the economy's performance under Eisenhower. They believed that the American economy could produce growth in production per worker of some three percent per year, yet in Eisenhower's administrations growth in production per worker had averaged only one percent per year. Of this shortfall Kennedy's Council of Economic Advisors attributed half to the gap between actual and potential production that the Eisenhower administration had seen emerge at its end, and half to a shortfall in underlying trend productivity growth. Before the Joint Economic Committee, Kennedy's CEA (made up of Walter Heller, Kermit Gordon, and James Tobin) attributed this slow growth in underlying trend productivity to deficient investment, which had fallen as a share of output from 1948 to 1960 by a quarter. And they particularly stressed the fall in investment in machinery and equipment: 8.3 percent of national product in 1948, but only 5.6 percent in 195960.
Clinton's economic advisors will mince no words in condemning the economy's performance under Reagan and Bush. Production per worker growth has been only 0.8 percent per year--even slower than under Eisenhower (but faster than the near-complete stagnation in the OPEC- and inflation-ridden Nixon, Ford, and Carter years). Moreover, the fruits of productivity growth have been unequally distributed: those occupying the blue-collar or the lowest-paid half of the white-collar slots in the labor market are earning less today than their predecessors in those slots were earning at the end of the 1970s.
Like Kennedy's CEA, Clinton's CEA will attribute slow growth to a failure to invest in America: a failure to invest in public infrastructure, coupled with the shortfall in private investment induced by the budget deficit. In the 1960s or even the 1970s a business cycle peak would see net private investment equal between eight and nine percent of national product. Under Bush, the 1990 business cycle peak saw net private investment less than four percent of national product. The capital shunted away from productive investment by the Reagan-Bush deficits would, if it had all been productively invested in the U.S., make us today perhaps seven percent richer--wealthier in total by $380 billion a year, enough to have boosted the average American's wages today by $3,000 dollars a year, and to have nearly doubled the Reagan-Bush growth rate of production per worker.
Kennedy's economic advisors urged a two-part program to shake off the economic relative stagnation of the Eisenhower years. In the short run they sought to stimulate demand in order to reduce unemployment, calling for lower interest rates, expanded spending on infrastructure, and an investment tax credit. Looking forward to a time when unemployment would have dropped to levels below which it could not be pushed without risking inflation, they called for long-run policies to boost underlying productivity growth by encouraging investment.
Scholarships to remove financial barriers to higher education, federal funds for building new campuses and secondary schools, and expanded federal funding both for current research and for expanding the pool of scientists and engineers made up part of the Kennedy administration's long-run growth policy; these steps encouraged investment in human beings, and in new technological knowledge. Private investment was to be spurred by reducing unemployment and achieving near-full capacity utilization, for "demand pushing hard on existing capacity stimulates investment, [thus] measures for economic recovery form an essential part of a balanced program for growth."
Accompanying this commitment to maintaining demand were policies to refocus business attention on investment, especially in machinery and equipment. This was seen as a necessary complement to education and technology policies, for "capital investmentinteract[s] with improved skills and technological progress. New ideas lie fallow without the modern equipment to give them life." Pro-capital policies included an investment tax credit, an exhortation that the Federal Reserve Board follow a policy of low interest rates, and a federal budget surplus that "plays the constructive role of adding to national saving and making resources available for investment"--private investment is constrained by available credit, and is unikely to be high if the federal governmen is a sink rather than a source of credit.
Kennedy economic policies were extraordinarily successful. Output per worker growth averaged 3.1 percent per year over 19604 and 2.6 percent per year over 19648. Almost all of these productivity gains were fundamental improvements in underlying productivity. Lesser portions were due to an unsustainable "overheating" of the economy: in 1967 the inflation rate-3.1 percent-was lower than in 1991. By 1968 Americans were one-sixth again richer as a simple extrapolation of Eisenhower-era performance suggests they would have been, a sum worth more than $5,000 of today's dollars for the average American worker.
Since it worked before, perhaps it could work again. Kennedy faced investment deficiencies in education, in high technology, and in private investment. Clinton faces all these, and a deficiency in infrastructure investment as well (Eisenhower had funded the Interstate Highway System). Kennedy inherited a federal budget that was in balance even under recession conditions. Thus Kennedy could find resources to finance seed projects in education and in technology, provide businesses with an investment tax credit (and ultimately Americans in general with an across-the-board tax cut), and yet still keep the federal government from sucking capital away from private investment.
Clinton has inherited a budget in severe deficit, that is already a severe drain on private investment. Of every four dollars that Americans, or foreigners saved in 1991, three went not to increasing the stock of capital in the hands of firms and entrepreneurs but to financing the deficit. Thus he will not be able to find the resources for a broad range of pro-investment initiatives. If he tries, he will find that what he produces with one hand is removed by the other as infrastructure spending causes a larger deficit which further dampens private investment. He will be lucky if he can find the resources for even one pro-investment initiative in one of the four areas--infrastructure, education, technology, and private business--that cry out for attention. By the standards of thirty-two years ago Clinton's initiatives are likely to appear somewhat meager, and too small to be effective unless care is taken to make sure that every dollar has maximum impact.
So we cannot expect Clinton's economic advisors to deliver to us a golden administration of economic growth like the one that Kennedy's economic advisors delivered some thirty years ago. The best that we can hope for is something like a bronze age, with at least some steps taken to encourage public and private investment, and some steps taken to make the federal budget somewhat less of a drag on the American economy.
But at least the age of lead-when presidential advisors were proud of their ability to juggle tax cuts and spending increases, and praised for helping to cripple the growth of American productivity for a decade--is over.
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Professor of Economics J. Bradford
DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
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